WSJ Has The Wrong Prescription For Social Security And Medicare

The Wall Street Journal advised Republicans to insist on certain Medicare and Social Security cuts -- such as raising the Medicare eligibility age and cutting future Social Security benefits -- as part of a deficit reduction deal with Democrats. But the Journal's proposals would harm retirees without providing much savings to the federal government.

WSJ Proposes Raising The Medicare Eligibility Age To 67

WSJ: If GOP Can't Enact The Paul Ryan Model, Raise The Medicare Eligibility Age. The Wall Street Journal's editorial on proposals for Republicans to change American social benefit programs suggested raising the age for Medicare eligibility:

Given the political difficulty of reforming entitlements, Republicans are right to try to get Mr. Obama's fingerprints on such a deal this year. But the reforms have to be worth it. With that in mind, we thought we'd offer a clip-&-save guide to reforms that would make a difference. None of this is commensurate with the scale of the problem, but then Mr. Obama won't sign anything that is. These changes are pragmatic and politically realistic, at least if Republicans drive a hard bargain.

[...]

Republicans can also continue to refine "premium support" on the Paul Ryan model, on a smaller scale. Mr. Obama campaigned as a defender of the status quo but now that the election is over some liberals are giving the concept a second look. Zeke Emanuel and others at the Center for American Progress recently endorsed competitive bidding to replace some of Medicare's administered prices. The danger is that a denuded plan would give a market gloss to a process akin to Pentagon procurement, but this is a potentially helpful intellectual concession.

Another option is raising the retirement age, which is already rising to 67 in Social Security. Longevity has increased by about 10% since 1965, and most reform plans would raise Medicare eligibility to 67 from 65 by the 2020s. This doesn't reduce the deficit now but is a credible way to reduce future liabilities. [The Wall Street Journal, 12/2/12]

CBPP: Health Spending Would Dwarf Any Savings The Federal Government Received From Raising Medicare Eligibility Age. The Center on Budget and Policy Priorities (CBPP) highlighted a Kaiser Family Foundation study on the costs to the country if the Medicare eligibility age was raised to 67 in 2014. The study assumed full implementation of the Affordable Care Act:

Raising the age of eligibility for Medicare would have ramifications far beyond the federal budget. People who lost Medicare would have to seek health coverage from other sources. This would affect not only their own personal budgets but also employers' costs, state budgets, and the premiums paid by Medicare beneficiaries and participants in the new health insurance exchanges.

A recent Kaiser Family Foundation study analyzed the key effects of raising Medicare's eligibility age to 67. [2] Unlike the CBO cost estimate, which assumes gradual implemen­ta­tion, the Kaiser analysis illustrates the effects of the proposal when it is completely phased in by assuming that the proposal is fully implemented in 2014.

Kaiser estimates that raising the eligibility age would save the federal government $5.7 billion in 2014. The savings reflect $24 billion in lower Medicare spending net of beneficiaries' premiums, largely offset by $18 billion in higher spending for Medicaid and subsidies for low-income participants in the health insurance exchanges. The estimated increase in costs to seniors, employers, states, and others, however, would total $11.4 billion -- twice the net savings to the federal government.

CBPP: Raising Eligibility Age Could Leave Many Low-Income Seniors Uninsured. CBPP economist and senior fellow Paul Van de Water noted that under current law, raising the eligibility age for Medicare to 67 could leave many poorer seniors uninsured:

MacGuineas and other proponents assert that health reform would assure that all 65- and 66-year-olds who lost Medicare would have access to affordable health coverage, either through Medicaid or the new exchanges. But, since the Supreme Court decision, that's no longer the case. Many poor 65- and 66-year-olds would likely end up uninsured.

Here's why: When President Obama and House Speaker John Boehner considered raising the Medicare age to 67 during last year's budget negotiations, the proposal under discussion assumed that policymakers would also require states to extend Medicaid coverage to everyone with incomes below 133 percent of the poverty line up to age 67; currently, health reform's Medicaid expansion applies up to age 65. Low-income 65- and 66-year olds losing Medicare would have qualified for Medicaid.

But the Supreme Court's June decision changes the situation. Now states can choose whether or not to expand Medicaid to cover all low-income adults. And even though the federal government will pick up nearly all of the costs of the expansion, many governors and state legislative leaders have expressed reluctance or outright opposition.

In states that decline the Medicaid expansion, raising the Medicare age would leave many low-income 65- and 66-year-olds without health coverage. That outcome is surely unacceptable. [Center on Budget and Policy Priorities, Off The Charts, 10/3/12]

Krugman: Raising The Medicare Retirement Age Is "Just Not A Big Money Saver." Nobel Prize winning economist Paul Krugman wrote that increasing the Medicare eligibility age is "a terrible policy idea," and that it won't save federal government much money "largely because 65- and 66-year-olds have much lower health costs than the average Medicare recipient":

Start with raising the Medicare age. This is, as I've argued in the past, a terrible policy idea. But even aside from that, it's just not a big money saver, largely because 65- and 66-year-olds have much lower health costs than the average Medicare recipient. When the Congressional Budget Office analyzed the likely fiscal effects of a rise in the eligibility age, it found that it would save only $113 billion over the next decade and have little effect on the longer-run trajectory of Medicare costs. [New York Times, 12/2/12]

And Experts Point Out That A Better Way To Deal With Medicare Is To Rein In Health Care Costs

Unlike cost shifting, building efficiencies in Medicare and pursuing delivery system reforms are promising solutions that can reduce health care spending without causing harm. The Affordable Care Act (ACA) affords many opportunities to test these innovations. Examples include lowering reimbursements rates for hospitals with high readmission rates and establishing provider teams, known as Accountable Care Organizations (ACOs), with financial incentives to keep costs down and better coordinate care.

Medicare is the testing ground for many of these reforms. Thanks to the ACA, Medicare will lead the market in providing better quality care at a lower price. Already, Medicare does a better job than private plans at controlling health care costs. Over the next ten years, Medicare costs are expected to rise 3.1 percent per person per year compared to 5 percent for private health plans. Medicare, after all, is not a problem, it is a solution. [Huffington Post, 11/13/12]

Bernstein: Affordable Care Act May Rein In Health Care Costs. Economist Jared Bernstein, former economic adviser to Vice President Biden, wrote on his blog that before raising the retirement age, policymakers should await full implementation of the Affordable Care Act, which contains health care cost control measures:

So does this mean Medicare savings shouldn't be on the fiscal cliff bargaining table? No, though I wouldn't fool around with the eligibility age. The President offers up about $280 billion (over 10 years) of cuts in his budget, including modified payments to providers, cost sharing with higher income beneficiaries, and lower drug costs in Medicare Part D. That's a fine place to start.

And a fine place to stop, for now. The real savings in health care will come from cost control measures enacted in the Affordable Care Act but nowhere near fully implemented, and it's just too soon to know if they're working. We must give them a chance -- early indicators are positive, though they may be conflated with recession-induced (i.e., temporary) dips in demand. If they fail to control costs, then it's back to the drawing board. But now's the time to watch and evaluate, not to reduce access to what is a highly efficient, effective form of health coverage for the nation's seniors. [On the Economy, 11/27/12]

Krugman: Instead Of Raising Eligibility Age, Rein In Health Care Costs. In a November New York Times column, Krugman criticized the idea of raising the Medicare eligibility age and suggested trying to control health care costs instead:

But what, ask the deficit scolds, do people like me propose doing about rising spending? The answer is to do what every other advanced country does, and make a serious effort to rein in health care costs. Give Medicare the ability to bargain over drug prices. Let the Independent Payment Advisory Board, created as part of Obamacare to help Medicare control costs, do its job instead of crying "death panels." (And isn't it odd that the same people who demagogue attempts to help Medicare save money are eager to throw millions of people out of the program altogether?) We know that we have a health care system with skewed incentives and bloated costs, so why don't we try to fix it? [The New York Times, 11/15/12]

WSJ: Cut Future Benefits Instead Of Raising Revenue To Make Social Security Sustainable. The Wall Street Journal editorial also argued in favor of changing the formula for cost of living increases for Social Security from being pegged to wages to being pegged to prices. Such a change would pay retirees less in the future. The Journal argued that this was a better alternative than increasing Social Security taxes:

The consensus in Washington is that the retirement program ought to be decoupled from the fiscal negotiation and fixed so that it is sustainable by itself for the next 75 years. Fine, but this still means slowing the growth of benefits and making Social Security a supplement to private saving, not a substitute.

Currently, Social Security's cost-of-living adjustment is determined by the rise of average wages, which wasn't carved in stone by FDR. The formula was created in the 1970s and overstates the rate of inflation and thus increases real benefits substantially over time.

Changing monthly payments to grow with prices, not wages, would resolve 75% of Social Security's financial problems. A version of this change called "progressive indexing" developed by Democratic financier Robert Pozen would slow the increase in future benefits for the most affluent seniors, while lower-wage workers would be held harmless.

[...]

On that score, Democrats will try to lift the cap on the income to which the Social Security payroll tax is applied, currently a few clicks over $100,000. But another 6.2% hit on every dollar over that level is a dramatic departure from current tax policy, even for the modestly affluent. On top of ObamaCare's payroll "surcharges," the top marginal rate would rise into the mid-50% range. Republicans should oppose any payroll tax increase. [The Wall Street Journal, 12/2/12]

But The Journal's Proposal Would Drastically Cut Future Social Security Benefits

CBPP: Changing Cost Of Living Adjustment From Wages To Prices Would Cut Benefits For Most Future Retirees. The CBPP explained the problem with indexing Social Security benefit increases to prices instead of wages, even if it was done in a way to provide some protection for the lowest-earning retirees:

The leading version of progressive price-indexing would cut benefits below currently scheduled levels for all but the lowest 30 percent of earners. Those cuts would grow for each future generation of retirees. Assuming that the policy started for people reaching age 62 in 2018 -- that is, for people who are now under age 55 -- the benefit reductions would reach nearly 30 percent for a medium earner by 2080. For higher earners, the reductions could equal as much as 50 percent in that year.

[...]

Social Security benefits are based on a worker's lifetime earnings. Progressive price-indexing would significantly weaken the link between earnings and benefits.

Social Security is progressive in the sense that benefits make up a larger share of previous earnings for lower earners than for higher earners, on the logic that lower earners are less likely to have other pension coverage and are less able to save. For example:

A low-paid worker who earned about $19,000 a year (in 2010 terms) and retires at age 65 in 2010 will receive an initial retirement benefit of about $10,200. That benefit replaces 55 percent of his or her prior earnings.

A medium earner whose earnings averaged about $43,000 a year gets an annual benefit of about $16,800. The benefit is larger in dollar terms than for the low-paid worker, but the replacement rate is lower -- only 41 percent. Put another way, the medium earner earned about 2.2 times as much as the low-paid worker, but his or her benefit is 1.6 times as high.

And the top beneficiary -- a worker who spent his or her entire career earning the maximum amount on which payroll taxes are levied (currently $106,800 a year), gets an annual benefit of about $26,300. This top earner earned 5.5 times as much as the low-paid worker but gets a benefit that is 2.6 times as high.

Progressive price-indexing would greatly weaken the link between retirees' benefits and their former earnings. The leading proposal would gradually reduce the benefits payable to all but the lowest 30 percent of workers. In the long run, the top 70 percent of workers would all end up getting virtually the same benefit, despite having paid very different amounts in payroll taxes. (See Figure 3.) That could undermine the program's broad public support over time, and as a result, jeopardize Social Security's most significant achievements, including its universal coverage and protection against death and disability. [Center on Budget and Policy Priorities, 11/17/10]

The CBPP analysis included the following illustration of the drastic benefit reductions faced by medium earners in the future:

And Social Security Can Be Made Solvent By Increasing Revenue

Brookings Institution: Social Security Deficit Could Be Closed By "Taxing More Earnings And At A Slightly Higher Rate." In an October 2 blog post, Brookings Institution senior fellow Henry J. Aaron argued that Social Security budget gaps should not be closed by cutting benefits, but instead by slightly increasing taxes. From Brookings:

Small tax increases or benefit cuts would assure solvency indefinitely. That said, the case for benefit cuts is weak. Social Security benefits are actually lower in relation to earnings than they have been for decades. They are downright parsimonious compared with those of most other developed countries--40 percent lower for average earners than the mean of the sixteen other richest members of the Organization for Economic Cooperation and Development. Furthermore, benefits are tied to earnings and U.S. earnings have either fallen or barely increased for decades, other than for very high earners. High earners have also been the principal beneficiaries of increased longevity. Life-expectancy among those with little education and, accordingly, with low earnings has actually fallen for the last two decades.

These trends suggest that the bulk of the work in closing Social Security's projected deficit should be carried by taxing more earnings and at a slightly higher rate, rather than by cutting benefits. [Brookings Institution, 10/2/10]

CBO: Eliminating Income Cap For Payroll Taxes Would Pay For Social Security Trust Fund Through 2083. In a July 2010 report on policy options for improving the funding of Social Security, the Congressional Budget Office (CBO) evaluated several options that would improve the program's finances. One of those options is to eliminate the maximum amount of income that is subject to the Social Security payroll tax, currently set at $106,800. According to the CBO, this policy change would "extend the trust fund exhaustion date to 2083." The CBO also said that "[t]his option would primarily affect taxes paid by high earners." [Congressional Budget Office, July 2010]

CBO: Eliminating Income Cap Without Increasing Benefits For High-Income Earners Would Fix The Trust Fund Beyond 75-Year Horizon. In the July 2010 Social Security report, the CBO determined that eliminating the income cap as in the previous option, but also using the current cap level to calculate benefits, "would extend the trust fund exhaustion date beyond the 75-year projection period." [Congressional Budget Office, July 2010]

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